SAC Capital (Point 72) and Blackstone Group Reputation Degrees

These 7-panel posters, as below, form the introduction and inaugural case study of a vigilance exercise in financial investments, initially.

The exercise name is "NoSmokeWithOutFire:Of Reputation" also abbreviated  as "NSWF:Reputation".

5th Oct 16 at time of "31-Years Low for GBP/USD at US$1.27 to GBP"

Loud Report: The Organ of Calumny #1

FPM's NoSmokeWithoutFire: Of Reputation

© NSWF:Reputation

#NSWF:Reputation

Loud report issued from FPM's inception case study named after maxim that "there is no smoke without fire", in terms calumny and reputation for an entity, whether an individual or an institution. FPM's interest in the matter is to present a persistent reminder of historical wrong-doing and associated reputation of capital market operatives. The mainstream media is intent on distracting the public interest with ever-changing newsflow with public-relations dressed up reporting of corporate and white-collar criminality.
 
A multi-billion dollar hedge fund management operation in America has acquired an inaugural rating and listing in the financial community's calumny and reputation. Point72 Asset Management ("Point72") is now sidelined as an 'investment family office' dealing opaquely in the global social-eco-political order through its capital markets activities. Point72 was previously operating as SAC Capital. a renowned hedge fund operations since 1992. The exile for Point72 is suggested by its dishonourable exclusion as a money manager for public or external capital.
 
This banishment for Point72 from accepting and managing public money stems from a securities fraud crackdown started in 2007 as "Operation Perfect Hedge". SAC Capital, as it was known then, among others was implicated in illegal "systematic insider-trading". To be clear, insider-trading or insider-dealing is  basically a swapping of illicit professional secrets for mutual benefits. "Illict professional secrets" are formally known as "Material Non-public Information".

A cornerstone judgement involving former SAC Capital employees have set new legal precedents on December 9, 2014. This represents a sneaky time to announce a legal verdict against the interest of capital market integrity  and the public. A major 'hideaway'  news when most people are distracted by seasonal festivities. The United States of America's Department of Justice ("DoJ") and multi-agency regulation enforcers have turned an immense corner in making insider trading harder to prosecute, and thereby letting securities fraudsters off the hook. The precedent was set when an appeal court overturned the insider trading convictions for Newman and Chiasson). 

While the multi-billion dollars business owner, Steven A Cohen, escapes any accusation of wrongdoing or criminality, the business bearing the initials of his name, SAC Capital, settled out of court or simply reached an agreement with the US Justice system to handover more than US$ 2 billion. Some perfidious cynics in the asset management game have laughed-off the matter of multi-billion dollars legal settlement as simply "the cost of doing business". FPM counters that kind of cynicism, which creates an uneven playing field for stock market investors, and undermining of the integrity of the capital markets. We actively campaign under "NSWF-reputation" and dub the investment manager at the centre of SAC Capital as the  "The Artful Dodger" and "The Unconscionable Mr Cohen". Or loud report reputational identity:

Point72 Asset Management’s

Steven A Cohen reputation degree:

 “Disgracefully Dubious Coign”.

Note that "Coign" is a play on nomenclature of the protagonist, and with another meaning to the circumstances. The word means also a cornerstone and keystone. FPM's principals don't allege "palms being greased" between billionaires and professional regulatory enforcers for the sake of some political expediency; we simply present debate and actively campaign against perceived and actual "Corrupt Crony Capitalism at the C-Level".

SAC Capital (now renamed Point72 Asset Management) is awarded NSWF: Disgracefully Dubious Dogma degree.

Somethings got to give: Mr Martoma’s Family Cannot Bear Burden Alone

In all sense of U.S. Justice Mathew Martoma CANNOT BE SERIOUSLY given nine years prison sentence for his insider trading securities fraud when the man Steven A. Cohen and his eponymous firm S.A.C. Capital that he committed these crimes for walks free after grease-palming the justice system of the Americas! “Something surely gotta give!”, seems an appropriate declaration to suggest that this is NOT THE END of the SAC-saga. A saga very much degraded as much as it was chronicled by institutionally pandering mainstream financial press; but veritably recorded and actively disseminated by Fund Portfolio Management –FPM. Principals at FPM have focused on insider trading protagonists at SAC Capital, and its reputationally smeared investor Blackstone Group under our “No Smoke Without Fire: Of Reputation Risk”. See our first blog post “No Smoke Without Fire!”. 

Mr Martoma must be utterly devastated and wholly indignant with the penultimate outcome (he is naturally appealing the sentence!), after multi-years judicial proceedings. And it is that bitter emotion and pervasive discontent feeling that should consume him inside-out through the sentence appeal and ultimately towards righteous and natural justice prevailing in the end. No! FPM are not evangelical preachers, but as an aspiring and integral high priest class of financial investments.

For integral justice to prevail and for restoration of real ‘animal spirits’ i.e. confidence (as opposed to smokescreen and mirror tricks of pump-&-priming from QE et al) in the crooked financial and judicial systems are vivid evidence of enforcement and punishment for wrongdoing. Mr Martoma should cut a deal with prosecutors towards humbling beyond-everyday-justice billionaire Mr Cohen. FPM are heeded from our previous announcement in early June via a post entitled “The Calm Before The Storm: SAC Takeaways – Part 1”:

“…Mathew Martoma’s sentencing could yet herald a fault line of tremors for Mr Cohen personally and set a precedent for the hedge fund industry…

…FPM expects the severity of the formulaic and deterrent-message in the sentencing to be significantly monumental…

…additionally, to induce Mr Martoma to co-operate with US prosecutors given the 6-8 years sentencing we expect...

Mr Martoma would proffer the main cull for the baying public anger and show some moral rectitude rather than be the sacrificial lamb for Mr Cohen.”

That Judge Paul G. Gardephe exceeded sentencing guidelines of the U.S. Government’s probation department DOES INDEED send a signal to would-be corrupters of the capital market integrity. However, the message is largely diluted because the head of “web-of-securities-fraud” Mr Cohen has evaded ANY sort of punishment. Americans used to say the “The Buck stops here!”; if blame is not laid at the helm of S.A.C. Capital then the message of the severe sentence, full confiscation and its exemplification suggests “don’t get caught if you cheat” or worse still, “don’t cheat unless you can afford it”. The old English adage that has gotten corrupted by revisionist colonists reacting to “chip-on-shoulder” syndrome, with incorrigible migration from developing nations, is “If you can’t do the time don’t do the crime!”

The risk of getting caught is increasingly seen as “cost of doing business”, yet hedge funds and banks do not set aside capital for ‘risqué practices’, though executive heads knowingly and publically take “the three-wise-monkeys” attitude. In FPM’s “NSWF: Of Reputation Risk” enterprise this is one of the hedge fund due diligence aspects of operational affairs. Judge Gardephe aptly sensing that any financial confiscation from Mr Martoma via forfeitures would be reimbursed by Mr Cohen, has accordingly set a high watermark in sentencing. Philosophically speaking, can Mr Cohen compensate Mr Martoma, his beautiful wife Rosemary (one for Mr Martoma's wall!), and their three children for a father and his 9 years’ absence from family?   

Mathew's Martoma Beautiful Wife

This above article is FPM integral views on capital market for the new millennia. Please contact kks@fundportfoliomanagement.com for advisory services on our “NSWF: Of Reputation Risk” enterprise.

Unwinding Risky Hedge Funds

FPM have been active in and monitoring the hedge fund seeding and stake-buying investments. Alternatively we refer to this business line as simply asset management finance.  Specifically to understand the life-cycle phase of the hedged fund industry through tracking asset management finance activity . An FPM principal has participated in a 2007 stake-buying club deal arranged by the now virtually defunct Lehman Brothers. With our financing credentials in hedge fund operations we identify and interpret trending ideas for institutional investors to be wary of. The sell-off or unwinding we discuss refers to the hedge fund asset class. This is not the same as “unwiding risky hedge funds” in a portfolio. In this article, FPM analyze yet another re-structuring phase in hedge fund investments.

The crux of our observations is that leading Alternative Investment Brand (“AIB) shops like Blackstone Group, TPG Capital, KKR & Co and Man Group are at varying stages in their re-structuring of hedge fund seed-stake activities. We understand from resourceful relationships that the multitudinous risks building on investment bank books since the financial crisis means exit doors have and are being sought by them, while other asset management entrants seeking to open new doors! A matter of timing is difficult to predict but the context of restructuring is clear to FPM associates.  AIBs and their select investors don’t seem to want to wear the expected hedge fund proposition implosion risk or in industry parlance known as ‘blow-up risk’, anymore. So this week, the AIB bellwether Blackstone floated the idea of offloading its holding of risky vehicles via an initial public offering:

“…Blackstone executives have told clients that taking stakes in hedge fund firms is a good opportunity for yield and raised the possibility of an IPO of a diversified portfolio of stakes…” WSJ MoneyBeat, 04 Jul 2014

By inference the multitude of risks festering in external hedge fund investments are greater than the promised return of finding and owning a piece of the next mega institutional asset manager, emerging from the new millennium fandangle ‘alternatives’ brand. FPM’s dissection of this product cycle is entitled “Product Convergence or Incestuous Orgy in Alternatives”. Our long-memory reminds our readers of the once poor reputation hedge funds had as highly risky institutional investments, as distinct from their regulated listed counterparts, the humble mutual fund. While that perception of hedge funds has changed with better reputation for them, the blow-up risks have not gone away due to their traditional modus operandi. A handful of institutionally evolved AIB managers with their polished-up financial public relations communications, clearly does not indicate that emerging new managers are not susceptible to blow-ups, whomever their reputable AIB sponsor maybe.

Hence why leading private equity group Blackstone, educated by its 30-years hedge fund investments experience and transparency from stake-seed investing, are now laying the IPO-foundation for arms-length engagement with external hedge funds. Passing the buck to unsuspecting institutional and retail investors eh! Also, partly explains why Blackstone is building its internal hedge fund offering and why FPM believe it is consequently internalising massive operational risk from its insider-trading association reputation alone:

"In one way, Blackstone's model resembles SAC Capital Advisors LP, the fund led by Steven Cohen Blackstone's trading teams will pitch their best ideas to a group... If it likes the ideas, Blackstone will give the team additional cash to piggyback on the trades or use the ideas in other firm products... SAC returned external money earlier this year in the wake of an insider-trading scandal."

Blackstone Readies Big-Bet Hedge Fund, WSJ 29th June 2014

Blackstone Group, Soros Fund Management and few others like Pequot Capital before it scandal-ridden closure, have long been vocal forerunners and ardent supporters, establishing the highly risky and questionable hedge fund strategies as an mainstream investment asset class. Since Blackstone’s formation in 1985 it has invested in hedge funds. Creating rumours that its Chinese Wall were breached, since it is a leading corporate deal-maker or private equity manager, which provided executive level ‘heads-up’ for the external hedge fund traders it backed. The famed George Soros and his management firm are also not without insider trading reputations. (See more in FPM’s “No Smoke Without Fire: Of Reputation Risk”, a case-study enterprise report of Blackstone Group’s sponsorship of systematic insider trading at Steven Cohen’s eponymous SAC Capital – a manager now renamed 72Point Asset Management and shuttered to external money)

The public offering of emerging managers FoFs proposition implies that the hedge fund convergence and implosion risks will increasingly be widely born by public pensions. Also, the IPO move suggests existing investors backing the Blackstone emerging managers’ funds are reigning-in their search for the ‘illusory and mythical’ alpha managers. Despite it being reported that J Tomlinson Hill, chief of Blackstone's hedge fund business, was quoted as intending to "dominate" the hedge fund seed-staking business.

The previous case of such large scale packaging and dumping was marketed as “collateralised debt obligations” investments.  Basically, CDOs were varying risky debt papers, which were securitised with enhanced ratings, packaged and offloaded by investment banks to unsuspecting global institutional investors. We know the aftermath of that folly! The structured product bubble exploded with the unravelling of the subprime mortgage debts constituting theses ‘diversified’ investments. Then, voila! global financial crisis. Similarly, FPM have tracked the incestuous cross-holding and ‘farmed’ investments in hedge funds by sponsors of the alternative investment universe. This deep knowledge database serves FPM to analyse FOFs constituting dodgy me-too hedge fund brands. By which we do not just mean beta funds masquerading as alpha investments, but those hedge funds that engage in sharp practices for their edge with inherent operational risks.

Lest we make the error known as “problem of induction” by citing one major example of Blackstone Group to generalise our point that re-structuring private equity of hedge funds is a cause for concern and opportunistic trend, we discuss a few other examples. Such as Man Group reportedly stating its intention to withdraw from further hedge fund seed-stake investments:

“Man Group is winding down its hedge fund-seeding business. Via its 2012 purchase of FRM, Man inherited a seeding vehicle that launched in 2007 with $400 million but is now in run-off mode following a recent restructuring…” HFAlert.com, 04 June 2014  

Also, note that KKR & Co, a US private equity pioneering giant with over US$100 bn assets under management (AuM) announced closure of an internalised equity strategy hedge fund last month June. For the KKR Equity Strategies wind-down, their public relations cite mediocre performance of average 5% annualized since its inception in August 2011. However hedge fund analysts understand that an operational scale of only AuM US$510 mn for a behemoth asset manager outweighed costs of its Goldman Sachs lifted prop' traders. As well as poor critical mass in assets managed KES only had 20 external investors. KES was reportedly started with US$100 mn from KKR. This is another blow-up risk in hedge funds, when the main sponsoring investor pulls out leaving a funding gap or forcing liquidation into premeditating 'short-squeeze' market. Such funding gaps are an opportunity fund manager transactions facilitated by FPM.

Despite above example, the crux of the matter is that early-stage ‘baby’ hedge funds, i.e. 3-5 years of existence and less than $1 bn AuM, are generally the hallmark of better alpha investments. They apply traditional hedge fund models such as strong performance, key-man operations, outsized bets, scaled capacity and innovative risk allocation including ‘dubious risky’ practices, all contributing to enhanced risk-reward payoffs. As early-stage managers get operationally significant with wider institutional investors base they become convergence story beta plays. Hence, one reason of many why established hedge fund managers, after being effectively incubated by their larger backers, for say a 5-year period, are ripe for strategic exits or IPO. Courting, marriage, honeymoon, separation and divorce are the allegoric conventional business transactions of private equity managers, historically a.k.a. corporate financing cycle.

Man Group and other AIB managers consolidated their own business FOFs model through acquisition. (Man Group acquisition of FRM); and then by in-housing direct investment hedge fund strategies (Man Group bought GLG). And when these AIBs wanted to expand their alternative universe and diversify their performance-related income with external operational revenue-sharing through a network of investment managers they undertook seeding and stake businesses. As the benefits of owning hedge funds outweigh the perceived, potential and real reputation risks its time to bolt for the hills. Analogous to investigative expose news, hedge funds are beyond the “scoop and splash” stages and have entered the “mature and decline” stages. Don’t take FPM’s “M&A of the Alternative Kind” enterprise exposition for it, look at TA Associates, an AIB private equity firm with a 46-year history of transactions including the financial institutions space. Last month in June Man Group had entered into a conditional agreement to acquire Numeric Investors from TA Associates. Numeric Investors have US$ 14 bn AuM and was established in 1989. This exit deal is still unconsummated but TA Associates held the Numeric Investors stake for 10 years.

The mentioned triumvirate enterprise execution themes of FPM[1] are encapsulated in exploring the difficult circumstances of DE Shaw’s 20% stake sale by Alvarez & Marsal, the financial practice liquidating the Lehman estate. The liquidators of Lehman have had challenges selling the hedge fund stubs since the investment bank’s acquisition of the stake a year before its bankruptcy in September 2008. Also, within fund manager transactions we noticed another private equity giant TPG Capital venturing further afield into the Asian hedge fund seed-stake business. Remember it was only recently in the evolutionary cycle of hedge funds that investment banks were forced to offload hedge funds under Volker Rule related to risk-weighted capital. Some investment banks hived their fund portfolio into client portfolio within their asset management divisions.

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[1]FPM Three Themes: 1) Product Convergence or Incestuous Orgy in Alternatives, 2) No Smoke Without Fire: Of Reputation Risk, 3) M&A of the Alternative Kind

The Calm Before The Storm: SAC Takeaways – Part 1

In the long-running insider trading saga of billionaire hedge fund manager Steven A. Cohen and his eponymous firm SAC Capital - a firm nowadays with a face-lift as “Point72 Asset Management”- there are still a few twists in the tale.

Fund Portfolio Management (FPM) for its “No Smoke Without Fire” investment enterprise on reputation risk suggest that today’s expected announcement (June 10^th) about Mathew Martoma’s sentencing could yet herald a fault line of tremors for Mr Cohen personally and set a precedent for the hedge fund industry. Especially in regards to the extent of criminal punitive sentencing in a caper that has been headlined as the “biggest insider trading scheme in history”, making the participants profits and/or avoiding losses to the princely tune of US$ 275 mn.

FPM expects the severity of the formulaic and deterrent-message in the sentencing to be significantly monumental. Seeing that Mr Martoma’s convicted crime exacted a record US$275 mn in ill-gotten gains, b) that he instigated connection and payments with the inside-information provider named Professor Sidney Gilman (a neurologist expert group witness who secretly provided non-public information on clinical trials of an Alzheimers-cure drug); and c) that his ‘offence level’ leads him right to the top of the conspiracy tree to Mr Cohen himself, via the 20-minutes conversation in July 2008 just before SAC Capital started unwinding it position in Alzheimer drug companies Elan and Wyeth.

FPM principle in his conscionable deliberation would expect the sentence to be harsh on a deterrent grounds basis, even though he was indicted and convicted on three counts, because of his central role in the conspiracy. And additionally, to induce Mr Martoma to co-operate with US prosecutors given the 6-8 years sentencing we expect today. Stop Press! At the request of Mr Martoma's defence attorneys the sentence hearing has been postponed and publically press-announced 5th June 2014! When the sentencing hearing, presided by Judge levies personal forfeitures and fines relating to the reported US$ 9 mn that Mr Martoma received as bonus for conspiring towards US$ 275 mn of illicit gains, could also be an inducement for Mr Martoma to squeal on Mr Cohen. Time in jail versus weighed up against hoarded assets / money hidden from prosecutors is the old trade off facing Mr Cohen's cronies in sentencing played out! How much is Mr Martoma’s silence worth to Mr Cohen? Mr Martoma has  3 children and a beautiful wife to sweat in hardened prison environment.  

Most of the pandering public press are speculating about 10 years sentence for Mr Martoma, our suggestion of 6-8 years analyses that in systematic-wide efforts to protect and earn the largesse of billionaire entrepreneur Mr Cohen, a maximum guideline sentence could not be applicable. Otherwise Mr Martoma would proffer the main cull for the baying public anger and show some moral rectitude rather than be the sacrificial lamb for Mr Cohen. We look at he another high profile case where the sentencing was also funninly leanient!!!

The 17-years veteran of SAC Capital and friend of Mr Cohen, Michel Steinberg, is the other most senior racketeer in the web of securities fraud seduced by illegal insider trading. Following his conviction in December on all five indictments, last month he received three and half years jail sentence. The prosecution had asked for a 5-6 years sentence. He got off lightly and the Judge even described him as "

a basically good man". Astonishing, the civility afforded to white collar criminals! That court case presiding Judge Sullivan also ordered Mr Steinberg to forfeit $365,000 and pay a fine of US$2 mn. Aggregate punitive redress by Mr Steinberg will include legal costs estimated by some legal experts as up to US$10 mn. Crime really does pay! at least on this occasion for Mr Steinberg’s attorney Barry Berke and his firm. He is currently free on bail awaiting the outcome of the US Court of Appeals for the Second Circuit in a related case-point in law. 

The case under Second Circuit appellate panel is expected to make imminent decision as to reversing or vacating the existing convictions. The convicted case involves the notorious ex-SAC Capital employees Anthony Chiassons (Co-founder of now defunct Level Global Investors) and Todd Newman (portfolio manager at also wound-down Diamondback Capital). They respectively received sentences of six and a half years and four and a half years, and are free on bail pending the appeal. Notice the central role of  Mr Chiasson and the severer sentence terms.  The argument that both men are presenting is that it is not illegal to trade on non-public, confidential information if they did not know that the person providing the information was receiving some benefit.

This SAC-saga still obviously has legs to run yet further!